I recently read about the financial relationships developing within the AI industry and thought of spreading awareness of why this boom resembles a bubble.
AI companies are increasingly involved in what is known as circular financing. Chipmakers such as Nvidia invest in AI companies and data-centre builders, who then use that money to buy Nvidia chips. In some cases, these companies also rent computing capacity back to Nvidia or its partners. The result is a cycle in which investment helps generate sales, while those sales, in turn, support further growth and investment.
This arrangement helps accelerate AI development, but it also raises an important question: how much of this growth comes from genuine customer demand, and how much comes from money circulating within the same group of companies?
Nvidia's deals involving OpenAI, Anthropic, CoreWeave and Australia's Firmus illustrate how deeply it is involved in the AI ecosystem, acting as a supplier, investor and, in some cases, customer too.
The danger lies in how interconnected these relationships have become. If one major AI company runs into financial trouble, the consequences could spread to its suppliers, investors and business partners. When companies depend on one another to sustain their growth, a setback in one part of the network can affect the others.
Australia's Reserve Bank has also raised concerns about opaque financing arrangements creating pockets of higher financial risk in the AI boom.
The excitement surrounding AI is understandable, and its potential is enormous. I am not questioning the technology or the possibilities it offers. What concerns me is the financial structure supporting some of the growth we see today. When companies invest in one another and the money flows back to the same suppliers, reported growth alone does not tell us the whole story.
A boom driven by genuine demand is one thing. A cycle in which money keeps circulating within the same ecosystem is another. The two can look remarkably similar—until the money stops flowing.
Oh that's interesting I didn't know about that. I did hear that AI isn't making much profit at all atm so they creating an illusion indeed Will the market catch up in time
ReplyDeleteThat is rather frightening. CoreWeave’s shares crashed by approximately 15.5% on Wednesday, amid concerns about its mounting debt and the sustainability of the AI boom. They recovered by 5.94% the following day, but such volatility certainly makes one question whether the market is beginning to catch up with reality.
DeleteA sharp and timely reflection - the circular financing loop you describe, with Nvidia's investments flowing back into its own chip sales, really does raise the bubble question in a way that is hard to ignore. The point about genuine customer demand versus money circulating among the same players is the crux of it. For similarly well-researched commentary I have also found the oncology brothers a helpful reference worth following.
ReplyDelete